Proof of Case

What’s the case about?

Were there grounds to maintain an injunction made against a cryptocurrency exchange?

Background

In Piroozzadeh v Persons Unknown [2023] EWHC 1024 (Ch), the High Court of England and Wales considered an application by Binance Holdings Limited (Binance), a well known cryptocurrency exchange, to discharge an injunction which had been made against it.

The claimant, a Canadian resident, was induced by a stranger to transfer funds to accounts held at US and German banks in 2021. He was then induced to transfer eight tranches of Tether to four separate cryptocurrency wallets utilised by the third defendant. These transfers totalled 870,818 Tether and occurred in November 2021.

By early December 2021, the claimant realised he was the victim of a scam. The claimant’s solicitors began making enquiries in the start of 2022 and investigation agents were instructed in June 2022. The investigation agents’ reports identified that the Tether could be traced to five wallets held with Binance and the ninth defendant (another cryptocurrency exchange).

The claimant then applied for and obtained injunctions against various parties, including Binance, another cryptocurrency exchange and two foreign banks (the initial hearing). The order made against Binance required it to preserve the claimant’s 479,904 Tether or its traceable proceeds received from certain wallets. The application was made without notice to the other parties.

The application by Binance

Binance then applied for an order discharging the interim proprietary injunction made against it, on the grounds that the injunction should have never been made without notice and that the claimant’s legal representatives failed in the duty of fair presentation to the court.

Binance’s uncontradicted evidence was that:

• Binance users do not retain any property in Tether deposited with the exchange;
• the user’s account is credited with the amount of the deposit and the user is then permitted to draw against any credit balance;
• the Tether is swept into a central unsegregated pool, where it is treated as part of Binance’s general assets. The Tether is not specifically segregated to be held for the sole benefit of the user from whose account it has been transferred;
• the Tether the subject of the proceedings was swept into one of two of these hot wallets; and
• since that had occurred, there had been hundreds of transactions per hour passing through those wallets.

In those circumstances, Justice Trower was of the view that any attempt to trace the Tether from the relevant user accounts at the time the injunction was made (over nine months later) would have been “an essentially futile and close to impossible and possibly impossible exercise”.

The main points relied on by Binance in support of the argument that the claimant’s legal representatives failed in their duty of fair presentation at the initial hearing were that the claimant:

1. did not properly explain the defences likely to be available to Binance in respect of its alleged liability as a constructive trustee;
2. did not explain why there was a sufficient risk of a breach of trust by Binance to justify an injunction;
3. did not explain why damages would not be an adequate remedy; and
4. did not explain how it was that Binance would in practice be able to comply with the order.

Should the injunction application have been made without notice?

Justice Trower referred to the relevant principle stated by Hoffman J in Re First Express Ltd [1992] BCLC 824 and noted that urgency is unlikely of itself to be sufficient in the absence of a well-founded fear that action to the detriment of the claimant might be taken by the respondent should notice be given. His Honour noted that ease of communication is now such that some sort of notice of such an application is nearly always possible.

Binance argued that no possible grounds on which injustice could have been caused to the claimant had been shown. Secrecy was not necessary as Binance was not alleged to be guilty of any wrongdoing.

As to the arguments advanced on this point, Trower J noted:

• the evidence for justifying a without notice application did not distinguish between the various defendants. This was a significant failing in circumstances where there was no evidence that Binance would take any steps or permit any steps to be taken were it to be forewarned of the application and nothing to that effect was said at the initial hearing;
• at the hearing of the present application, the position then taken by the claimant was that Binance was not given notice because there might have been an inadvertent tipping off. His Honour was not persuaded this was a good answer to the point for a number of reasons, including that there was no specific evidence that might have caused the court to conclude that tipping off was a material risk;
• taken purely in isolation, this factor alone would not have justified the discharge of the injunction once granted;
• proceeding against the fraudsters and then serving the orders on Binance as a non-respondent (as Binance submitted) would have been a much more appropriate way forward; and
• the failure to give notice to Binance cannot be considered in isolation, in circumstances where it was argued that the claimant failed in his duty to make a fair presentation of the case at the initial hearing.

After noting the scope of the obligation upon a party in seeking relief without notice, Trower J then considered the main points advanced by Binance.

Alleged liability of Binance as a constructive trustee

Trower J noted that the Judge hearing the initial application expressed concern as to whether Binance was a constructive trustee if it was simply an exchange. At the initial hearing, Counsel for the claimant asserted that an exchange was a constructive trustee because the exchange was in control of cryptocurrency assets and that in an earlier English decision it had been held that exchanges were constructive trustees.

His Honour noted that, at the initial hearing, the claimant did not make any reference to what really mattered as a defence by the exchanges – in that once the Tether had been swept into the exchange pool, the users were then granted credit in the amount of the value swept, which would then constitute the exchange as a purchaser and no longer susceptible to any remedy at the suit of the claimant so long as it acted bona fide. Trower J was of the view that those possible legal consequences should have been mentioned to the initial Judge.

This issue was made more acute because its true significance was distorted by the evidence put forward by the claimant which was to the effect that the Tether was, at that time, in the exchange defendant’s’ control. Trower J found that statement was obviously incorrect.

His Honour also noted that the earlier decision of D’Aloia v Persons Unknown [2022] EWHC 1723 (Ch) referred to by the claimant was a decision of his Honour, which also involved Binance and the same legal representatives as those acting for the claimant. By the time the initial application was made, it had become known from the defence run by Binance in D’Aloia that its modus operandi involved pooling and where that occurred it was likely to assert a bona fide purchaser defence. His Honour noted not only was this not mentioned to the initial Judge, but the claimant sought to persuade that Judge that the Tether was still identifiable as within the control of Binance at the time of the application.

Damages as an adequate remedy

His Honour was of the view that the applicant’s argument on this point should have been presented in a more comprehensive manner – in particular there was no explanation as to why Binance should have been “tarred with the same brush” as the first, second and third defendants. It remained unclear to Trower J that damages were not an adequate remedy.

How could Binance practically freeze the traceable proceeds?

Trower J considered there was a very important non-disclosure and failure to explain by the claimant in the initial hearing, in circumstances where the initial Judge was given no explanation as to how Binance was able to freeze the Tether as a matter of practical reality or to identify it for the purposes of justifying the injunctive relief sought. This issue was “thrown into quite sharp relief” given the initial Judge had indicated at the start of the hearing that he was concerned the application was an exercise in futility because of the lapse of time in making the application.

His Honour noted that even at the time of the present judgment it remained unclear how it was said by the claimant that Binance could identify the traceable proceeds of the claimant’s Tether.

Conclusion – the injunction should be discharged

Trower J was of the view that the matter was not, objectively speaking, fairly presented to the initial Judge. In those circumstances the injunction against Binance should normally be discharged.

His Honour then considered whether the court should exercise its discretion to continue or regrant the injunction, despite the failure to fairly present the case. His Honour was of the view that there was no basis on which it would be right to remake the injunction. In doing so, His Honour particularly noted:

• in respect of parts of the initial application, the claimant’s presentation did not make sufficient distinction between the first and further defendants one the one hand and the exchange on the other;
• exchanges can often find themselves joined as respondents for the purposes of the grant of Bankers Trust relief and/or injunctive relief. If so, it is “particularly important that the nature of the claims against them and whether there is a substantive claim or merely a claim seeking Norwich Pharmacal or Bankers Trust relief is properly differentiated”;
• there was no risk of any significant injustice to the claimant if the injunction was discharged;
• there was still no explanation as to why damages would not be an adequate remedy should a claim against Binance succeed at trial; and
• the injunction would serve no useful purpose because it was wholly impracticable for Binance to preserve the deposited Tether. The evidence was overwhelming that the Tether had long since been mixed and dissipated in the pooled addresses.

The consequence of Trower J’s conclusion was that the injunction was discharged from the date on which it was granted.

Take aways:

• Careful consideration needs to be given to the basis for injunctive relief against cryptocurrency exchanges, particularly where the application occurs without notice to the exchange;
• An applicant will need to consider whether there is any utility in seeking such orders against an exchange, especially if there has been a significant lapse of time since the events in question occurred;
• Detailed consideration needs to be given to the nature of the cryptocurrency in question and the manner in which the exchange operates. A glossing over of those factors could be fatal to an application seeking relief against an exchange;
• Evidence on such applications which does not differentiate between cryptocurrency exchanges and other potential defendants (such as a bank) is unlikely to be helpful to the Court, or of assistance in advancing the applicant’s case.  

Where can I find the case? [2023] EWHC 1024 (Ch)